A.

Recap
 Slope as the Marginal Value
Y
A
Slope at point A =
-1/4
Slope at point B =
B
-1/1
Slope at point C =
-5/1

X
 Chapter 2
The Modern Mixed
Economy
RMPanti, UPSE
081716
A. The Market Mechanism
 Definitions
Market

A market is a mechanism through which buyers and sellers

interact to determine prices and exchange goods, services,
and assets

Price

Price is the value of the good in terms of money. It represents

the terms on which different items can be exchanged and
 Definition

Market Equilibrium

Market equilibrium represents a balance among all different

buyers and sellers
 Markets and the
Three Economic Problems
What to produce
Dollar votes of consumers and profit or the net revenues of
firms

How
Competition which drives firms to maximize profits by keeping
costs at minimum by adopting the most efficient methods of
production

For whom
Who is consuming and how much
 Dual Monarchy
Tastes

Innate and acquired preferences

Technology

Capacity to produce
B. Trade, Money, and Capital
 Modern Economy

1. Elaborate network of trade

2. Extensive use of money
3. Modern industrial technologies rest on the use of vast
capital stocks
 Trade, Specialization,
and Division of Labor
Division of Labor

Dividing production into a number of small specialized

steps or tasks

Specialization

Occurs when people and countries concentrate their

efforts on a particular set of tasks
 Money

Money is a medium of exchange.

It is the means of payment in the form of currency and

checks used to buy things.

It is regulated through Central Banks

 Money
Three Main Functions

1. Medium of Exchange
2. Store value
3. Unit of account
 Capital

Capital is a produced and durable input which is itself an

output of the economy.

Examples: machines, buildings, computers, software

Capital can grow through savings.

C. The Visible Hand of
Government
 Governments Economic
Functions

1. Increase efficiency by promoting competition, curbing

externalities, and providing public goods
2. Promote equity by using tax and expenditure programs
to redistribute income
3. Foster macroeconomic stability and growth through
fiscal and monetary policies
 Efficiency

Perfect competition exists when no firm or consumer is

large enough to affect the market price.

Perfectly competitive markets will produce an efficient

allocation of resources
 Efficiency
Market Failures

Imperfect Competition
occurs when a buyer or a seller can affect prices; the extreme
case of imperfect competition is called a monopoly
Externalities
occurs when firms or people impose costs (negative
externalities) or benefits (positive externalities) on others
outside the marketplace
Public Goods
commodities which can be enjoyed by and from which no one
could be excluded
 Equity

Efficient markets do not necessarily produce a fair

distribution of income.

What can governments do?

Progressive Taxation
Subsidy
Transfer payments
 Macroeconomic Growth
and Stability
Fiscal Policies

involve governments power to tax and power to spend

Monetary Policies

involve determining the supply and interest rates